What “Risk Capital” Really Means for SPAC Sponsors

Chris Cottone explains what risk capital is in a SPAC, why it’s required, and how much sponsors should realistically expect to commit. 

He breaks down IPO and DESPAC costs, typical risk capital ranges, and how sponsor syndicates can reduce upfront financial burden through shared participation.

Disclaimers:

The views, opinions, and statements expressed by the guest are solely their own and do not necessarily reflect the views of The SPAC Podcast, its hosts, or affiliated organizations. This content is for informational purposes only and should not be construed as investment, legal, tax, or accounting advice.

Michael J. Blankenship is a licensed attorney and is a partner at Winston & Strawn LLP. Joshua Wilson is a licensed Florida real estate broker and holds FINRA Series 79 and Series 63 licensure. The content of this podcast is intended for informational and educational purposes only and should not be interpreted as legal, financial, or compliance advice. The views and opinions expressed by the hosts and guests are their own and do not necessarily reflect the official policies or positions of any regulatory agency, law firm, employer, or organization.

Listeners are encouraged to consult their own legal counsel, compliance professionals, or financial advisors to ensure adherence to applicable laws and regulations, including those enforced by the SEC, FINRA, and other regulatory bodies. This podcast does not constitute a solicitation, offer, or recommendation of any financial products, securities transactions, or legal services.

Let’s Connect on LinkedIn:

👉 Michael J. Blankenship - https://www.linkedin.com/in/mikeblankenship/

👉 ...

Transcript

Mike B: So, Chris, we hear the term risk capital. Can you tell us what that is and, and how much risk capital would a SPAC sponsor need? 

Chris C: So risk capital, well, let's, let's first talk about what's the, no, the, the no risk capital. No risk capital. When the investors put their money in, that money stays in a trust and doesn't go anywhere.

Right? And so at the end of the deal, of course, as, as most people know, they have an option to redeem that those shares and juju some interest component. However, those, that money doesn't cover all the fees that are associated with an IPO. So you have your. Legal. You have your accounting, you have your underwriter fee, you have your NASDAQ fee, you have your perhaps some ongoing management fee, like maybe your CFO is doing, the QS and the Ks, things like that, so that at at risk money is designed to cover.

All of those IPO costs and then also the operating cost to get you through the D spac. That's all the due diligence fees. Sometimes you need a fairness, valuation, all that, right? So we're seeing the range, what what we feel is a what, what we, we add up all the potential expenses that can occur from IPO to D spac.

And we're seeing those ranges come in between 1.8 million and 2.3 million. Which is a lot of money. And so what one of the things that we've, uh, helped work with issuers, uh, or potential issuers over the last couple years is forming syndicates to help, uh, participate in that sponsor capital. And the way that that works is you can bring in a small group of investors, uh, to possibly reduce that amount.

So say, for example, your total at-risk pool is gonna be $2.3 million. The syndicate might be willing to bring a million and a half dollars to the table. Well then the spon, the SPAC sponsor team might only need $800,000 in that case to, to bring to the table. So it ends up becoming more budget friendly.

Now, the, the give and take in that situation is the SPAC team typically has to do a, there's a negotiation they'll take place with the syndicate, uh, on the founder shares. And so, uh, they're not. Just going to want to buy sponsor shares normally at $10 and be at risk when everybody else is not at risk.

All the other $10 investors. So you're, you're typically the give and take there is, you're incentivizing those folks in the syndicate by giving them some of the founder shares that, uh, that you have in the founder share pool.